This article highlights a number of potential pitfalls in this area and offer some practical guidance as to how such problems can be avoided.
The scope and limits of the retainer
Solicitors, in common with other professionals, have an implied duty to protect their clients' interests and to consult with them on any matters of doubt which arise during the course of the retainer. The failure to do so is a prolific source of claims within the profession, particularly in relation to non-contentious work. It is, therefore, important to set out in clear terms the scope and limits of the retainer and, in particular, to identify any issues upon which the solicitor will not be advising. Accordingly, where tax issues are being dealt with by other advisers, the position should be recorded in the retainer letter in order to ensure that there is a clear and mutually accepted understanding of the scope of the solicitor's engagement.
The difficulties which can arise in this context are illustrated by the decision in Hurlingham Estates v Wilde & Partners  1 Lloyd's Rep 525. The Claimant, who entered into a property transaction, was exposed to an additional tax liability which could have been avoided had a different structure been applied. Lightman J rejected the solicitor's evidence that it had been specifically agreed that he (the solicitor) would not advise on tax issues. Such a limitation would, in any event, have required the client's fully informed consent and this could not have been present, given the solicitor's evidence that he had no knowledge of tax law and, therefore, no appreciation of tax risks involved in the transaction. Nor, in the absence of any such agreement, was there any justification for the solicitor assuming that the Claimant would be seeking tax advice on the transaction from its accountants, auditors or anyone else.
The Judge acknowledged that such an assumption could be justified in certain circumstances, stating that:
"A solicitor retained on a transaction may not be under a duty to advise on some legal aspect of the transaction, e.g. taxation, because it may reasonably be apparent to him that advice on that aspect is not needed by the client and accordingly is not within his remit, but within the remit of someone else e.g. a substantial client's expert tax department (see Virgin Management v De Morgan Group...)."
In Virgin Management v De Morgan Group  EGCS 16, the Court of Appeal accepted that the solicitor was entitled to assume that the fiscal implications of the transaction in question were being considered by others with greater expertise in such matters than himself, whether they be representatives of the client's in-house team or third party advisers. Thus, Leggatt L J concluded that:
"However the duty is pleaded, in the end it comes to an allegation that [the solicitor] was under a duty to advise experienced and sophisticated clients with ready access to fiscal advice that the terms of the transaction which they had agreed and which he had been instructed to put into legal form might be fiscally imprudent. We entirely agree with the Official Referee that the allegation cannot be substantiated."
Responsibility for tax advice should, however, be dealt with expressly at the outset. It is possible to include a provision in a firm's general terms of business that the services will not include advice on tax related issues or the tax implications of any transaction or course of action unless (and then only to the extent that) this is expressly agreed at the commencement, or during the course of a matter. Note, however, the need for a client's informed consent to agree to such a limitation where there are material tax issues.
Involvement of other advisers
The issues referred to above are particularly important where other professionals (notably accountants) are involved on a transaction or matter, as it will be necessary to demarcate any tax advice for which the solicitor is, and is not, responsible. It may be difficult to obtain access to the retainer letters of other advisers, although the scope and limits of the respective retainers should be addressed at the outset.
Large firms of accountants now routinely limit their liability to clients for tax and other advice and this may, in turn, impact upon the ability of the solicitor and his insurers to obtain contribution from them (as to which, see below).
Potential third party claims
The principles governing the existence of a duty of care to third parties are summarised in the first article in this edition of the bulletin.
Where legal advice is provided in the context of tax planning, its effect may not be limited to the solicitor's client. If, for example, a solicitor advises the promoter of a tax saving scheme and such advice is made available to persons who are considering implementing the proposals, those persons may be owed a duty of care should the scheme fail, save where an appropriate disclaimer (satisfying the requirements of the Unfair Contracts Terms Act 1977 or the Unfair Terms in Consumer Contracts Regulations 1999) has been included.
Where tax opinions are provided (for example, that the payments under a transaction are not subject to any withholding tax or stamp duty), these should be prepared in accordance with the principles enunciated by the City of London Law Society.
The duty to qualify advice where appropriate
Difficult issues frequently arise in the area of tax, requiring a detailed analysis of the relevant statutory provisions and authorities. The fact that a solicitor's interpretation is not ultimately upheld, does not, of itself, connote negligence, provided that the opinion which he expressed was a reasonable one by reference to the standards of reasonably competent solicitors professing specialist tax expertise. The duty is not to be right; the duty is to exercise reasonable skill and care.
Where, however, the outcome of an issue is uncertain and there is, for example, a real risk of a claim being pursued by the Revenue, the solicitor should take this into account in his advice and put the client in a position to make an informed decision as to the best way forward.
These principles are illustrated in the Court of Appeal decision of Grimm v Newman & Another  1 AER 67, in which the Claimant sought to recover damages against his accountant. In summary:
- the Claimant, a United Kingdom resident non-domiciliary, consulted his accountant on how best to fund the purchase of a family home in the United Kingdom without suffering tax on the remittance basis. The Claimant's income included Schedule E, Case III earnings which were subject to United Kingdom tax only on the remittance basis. The Defendants advised that a proposed gift would not be taxable provided that it was a gift on marriage. Accordingly, shortly after his marriage, the Claimant gifted funds to his wife who then brought the money into the United Kingdom and used it to fund her half of the purchase of a jointly owned family home
- the Revenue challenged the transaction and claimed tax on the basis that it was a constructive remittance by the Claimant of his foreign emoluments to the United Kingdom
- advice was obtained from counsel who considered that the Revenue's claim should be conceded, as there were "strings" attached to the gift, which had been made overseas. As a result of that advice, the Claimant entered into a global settlement with the Revenue, which included an element for tax on the "remittance" made by his wife
- the Claimant commenced proceedings against his accountants, contending that their advice had been wrong in law and that, if properly advised, he could, and would, have restructured the transaction in a way that would not have given rise to United Kingdom tax.
In his judgment, Etherington J expressed no view as to whether the advice given by the Defendants was right or wrong. Instead, he concluded that a reasonably skilful and careful accountant tax adviser would have realised and informed the Claimant that the advice, if implemented, ran a high risk of a successful Revenue challenge. The Judge further held that an alternative scheme could have been devised to avoid tax and, on that basis, he gave judgment to the Claimant for the full amount of the tax paid.
The Defendants appealed.
The appeal was successful and the claim was unanimously rejected by the Court of Appeal, who held that:
- where, in an action for negligent tax advice, the issue between the parties was whether or not the advice had been correct, the court had to determine that issue. Further, if the efficacy of an alternative scheme was relevant, a decision on the soundness of the original advice, as a matter of law, was also necessary. It followed in the present case that it was necessary to determine whether or not the accountants' advice had been correct in law. That advice had been correct and, accordingly (Carnwath L J dissenting) the accountants had not been negligent
- in any event (Carnwath L J concurring), even if the advice had been wrong, the negligence would not have been causative as there was no alternative scheme, which would have avoided the tax.
In his dissenting Judgment, Carnwath L J upheld the finding of negligence at first instance on the basis of the Defendants' failure to warn of the significant likelihood that the Revenue would claim tax and would succeed. Thus, Carnwath L J held:
"The Claimant's case did not depend simply on the contention that [the accountants] were wrong in law. The alternative contention was that, whatever the courts might ultimately have been held to be the correct position in law, there was a significant likelihood that the Inland Revenue would claim tax, and would succeed. Implicit in that, as I read it, is the allegation that [the accountant] should have been aware of that risk, and taken it into account in his advice to his client. That alternative formulation expresses the practical reality that, whatever the position in strict law, most people prefer to avoid a battle through the courts with the Inland Revenue; and they expect their tax adviser to take reasonable steps to protect them from such an outcome…The issue is not whether the advice would ultimately have been upheld, because that is not what happened. The issue is whether a reasonably skilful adviser… should have recognised the risk of what in fact occurred, and advised his client accordingly."
Following the Court of Appeal's decision, a court faced with this type of issue is now likely to approach it in the following way:
- first, adopting the majority view of the Court of Appeal, was the advice correct as a matter of law?
- second, if the advice was incorrect, was the view expressed a negligent one?
- third, if the advice was correct as a matter of law, was there nevertheless a negligent failure to warn of the risk of a contrary interpretation and a Revenue challenge?
In bald terms, getting the law right may not be enough although, in practical terms, a court is likely to have considerable sympathy for a professional adviser whose views are ultimately upheld as having been correct. Clients also look to their lawyers to provide them with legal and practical solutions to commercial problems (rather than advice which is subject to a string of caveats), although if there are grey areas or elements of uncertainty, the client must be put in a position to reach an informed decision as to what course to adopt.
Reasonable reliance on the advice of counsel
See the principles set out in the preceding report on Foster v Alfred Truman  EWHC 95 QB and, in particular, the reference in the commentary to the judgment of Lloyd J in Matrix Securities (where both the solicitors and leading tax counsel escaped any finding of liability).
Where complex and difficult issues of interpretation arise, reasonable reliance upon the advice of counsel may well provide a cogent line of defence, particularly where reliance has been placed upon the advice of leading counsel. This principle is subject to three qualifications: first, that appropriate counsel has been selected; second, that counsel has been properly instructed; and, third, that, in considering counsel's advice, the solicitor has exercised his independent judgment in a reasonable manner.
Limitation of liability
Many large firms of accountants routinely seek to limit their liability to clients in a manner which could be prejudicial to the ability of the client's other advisers (including solicitors) to obtain a contribution from them. This approach has led many larger firms of solicitors to seek to agree proportionate liability clauses with clients, the practical effect of which is to exclude any amount which the solicitor would have been able to recover from the other party but is unable to do so because the client has agreed an exclusion or limitation of that party's liability.
Leaving aside the position of other advisers, it may in certain circumstances, be appropriate for the solicitor to consider seeking a limitation of his liability to the client and (where appropriate) to any relevant third parties.
There are a number of practical steps which can help to reduce the scope for claims or problems in this area:
- the scope and limits of the solicitor's duties in relation to tax advice should be defined at the outset, particularly where other advisers (such as accountants) are also involved in a transaction or matter
- be alert to the potential for third party claims
- qualify advice where appropriate in order to put the client in a position to make an informed decision as to the best way forward. Getting the law right might not be enough if the client ought to have been warned of the risk of a Revenue challenge
- where limitations of liability are (or are likely to be) agreed with other advisers, such as accountants, consider the use of a proportionate liability clause
- retain all notes of meetings and discussions (including handwritten notes) on the file in order to reduce the scope for potentially damaging and costly conflicts of oral evidence.